Recourse or non recourse? What your guarantee really covers

Every commercial loan answers a question that borrowers often skim past. If the property cannot repay the debt, who can the lender pursue? The answer separates recourse from non recourse debt. It also shapes your pricing, your leverage, and your personal balance sheet for years. Read the guaranty as carefully as you read the rate.

What the terms mean

With a recourse loan, the lender can look beyond the collateral. If a foreclosure sale does not cover the balance, the lender can pursue the guarantor for the shortfall. Guarantors are usually the sponsor, the principals, or a parent entity.

With a non recourse loan, the lender agrees to look only to the property and its cash flow. If the asset falls short, the lender takes the loss. In practice, non recourse is rarely absolute. Most loans sit somewhere on a spectrum.

• Full recourse: the guarantor backs the entire balance.
• Partial recourse: the guarantee is capped at a fixed amount or a share of the loan. It may burn off as the property hits agreed milestones.
• Non recourse with carve outs: the loan stays non recourse unless the borrower or guarantor does something the documents prohibit.

The carve outs matter more than the label

Non recourse loans almost always come with carve out guaranties, often called bad boy guaranties. These list acts that turn the loan, in part or in full, into personal liability. Common triggers include:

• Fraud or intentional misrepresentation
• Misapplication of rents, insurance proceeds, or security deposits
• Unpermitted transfers of the property or of ownership interests
• Voluntary bankruptcy filings
• Failure to maintain insurance or pay property taxes
• Environmental liabilities

Some triggers create liability only for the lender's actual losses. Others put the full loan balance on the guarantor. That difference matters. Under some documents, a small ownership transfer made without consent could trigger full recourse. Negotiate the list, the standard of proof, and which triggers carry full liability versus loss only liability. Have your attorney review the guaranty before the term sheet is signed, not at closing.

Who offers which

Lender type often predicts the structure.

• Banks and credit unions usually require recourse on smaller loans, construction loans, and transitional assets. They lend against the relationship and the guarantor's strength, not just the property.
• Agency and CMBS lenders typically offer non recourse with standard carve outs on stabilized assets. The tradeoff is less flexibility, stricter transfer rules, and heavier prepayment terms.
• Life companies often lend non recourse at moderate leverage on high quality, stabilized property.
• Debt funds vary. Many offer non recourse bridge loans with completion or carry guaranties attached.

SBA loans and most business loans are recourse. Personal guarantees are standard there.

Weighing the tradeoffs

Recourse is not automatically worse. A strong guarantor can sometimes get more leverage, better terms, a faster close, or more flexibility from a bank that values the relationship. Non recourse protects your other assets. It usually costs something in proceeds, structure, or flexibility.

Questions worth asking before you choose:

• How much of your net worth already sits behind other guarantees? Lenders will ask for a schedule of contingent liabilities.
• Does the business plan carry real execution risk, such as lease up or construction? Recourse may be the price of getting that loan done.
• Will you want to sell interests, bring in partners, or refinance early? Transfer and prepayment terms on non recourse debt can limit that.
• Can the recourse burn off? Ask for the guarantee to step down once the property reaches a stated coverage or occupancy level.

Guarantees across a portfolio

Each guarantee may feel manageable alone. Together they can stack up. Lenders on future deals will review your contingent liabilities and may count them against your liquidity and net worth. A sponsor with several recourse loans can find the next loan harder to place. Track every guarantee, its cap, its burn off terms, and its maturity in one place.

The right structure depends on the asset, the business plan, and what else sits on your balance sheet. To see how lenders are likely to size your deal, start with our debt sizing tool. If you want a second set of eyes on a term sheet or guaranty before you commit, reach out to our team.